1. Field of the Invention
This invention relates broadly to computer-implemented financial analysis. More particularly, this invention relates to computer-implemented financial analysis methodologies for determining the profitability and the present value of an investment or entity over an investment period as well as products and systems based thereon.
2. State of the Art
In business, people often are confronted with the evaluation of the impact of an economic investment, which is a series of forecasted actions and events that produce and/or sell goods or services over a predetermined investment period. Such an economic investment can be part of an investment plan or an annual budget. In order to do evaluate the economic investment, a financial analyst (or a group of analysts) typically identifies and budgets incidents with respect to involved activities/departments (e.g., sales, production, expenses, purchases, payroll, collections, payments, etc). The incident values are used to calculate the profit and loss of the investment over the investment period. A net present value result is calculated based upon individual cash flow collections and payments. This net present value result provides a single monetary figure that characterizes whether the expected monies generated by the investment over the investment period will exceed the monies that are required to be paid out during the investment period. In this manner, the net present value result provides meaningful information that is often used as an important point in deciding whether or not the investment should be made.
Typically, the net present value result is derived by modeling the investment as a sequence of positive and negative cash collections. The cash collections (positive values) and payments (negative values) are discounted into their equivalents as of the date of the beginning of the investment, after taking into consideration the appropriate discount rate. That is to say in simple terms, if an annual interest rate of 10% is assumed, then the possession on Jan. 1, 2006 of a sum of 100 EUR is equivalent with the future collection of a sum of 105 EUR after 6 months. With this method, all cash collections and payments are discounted into net present values, and in the end they are added up. If the result is positive, the investment is profitable, while if it is negative it is a loss maker.
The general mathematical formula that is used to discount a future cash flow to its net present value is the following: the future cash flow is divided with a factor, which is the number 1 plus the interest rate of interest bearing period, but only after the factor is raised to the v power, where v is the total number of interest bearing periods. The result of that division is the net present value of the cash flow.
Such prior art net present value methodologies have significant limitations. First, implementation of the methodology is exceptionally difficult for complex investments that produce a large number of financial incidents over numerous dates. Second, the methodology is by its own nature exceptionally inaccurate, because situations with distinct differences are handled in the same manner. Moreover, there are often real and usual (even daily) situations for which it cannot give a suitable answer because of the inaccuracies built into the method. Finally, the method is incapable of generating a suitable answer for large investments because of the inaccuracies built into the method.
For example, the following real-life scenarios depict limitations of the prior art methodologies.    1. As a consequence of the multiple daily collections and payments, it is possible that for some days of the month the investment's bank account will have a negative cash balance and accordingly produce an interest expense (typically at a 6% interest rate for current lending rates), while certain other days of the month the investment's bank account will have a positive cash balance and accordingly produce interest income (typically at a 0.5% interest rate for current bank rates). The prior art methodologies are unable to and fail to determine daily bank account cash balances and thus are unable to determine if and when to apply such interest payments and interest credits. Such inabilities limit the accuracy of the underlying net present value calculation and analysis.    2. Similarly, under certain circumstances such as when the accounting balance (and not the valeur balance) is negative for the last calendar date of a given month, an additional tax contribution may be due by applicable tax statutes (e.g., the Greek Tax Law 128/75). Such tax contributions constitute a cash flow (expense). The prior art methodologies do not account for such tax contributions, which limit the accuracy of the underlying net present value calculation and analysis.    3. Similarly, from the interest income note in 1 above, there is a withholding of income tax from the bank at the date of interest calculation (a negative cash flow). Such income tax withholding is typically offset to a later date for year end tax calculations. The prior art methodologies do not account for such interest income and the tax consequences associated therewith, which limit the accuracy of the underlying net present value calculation and analysis.    4. The yearly net income of the investment is typically allocated into categories including a reserve fund, distributed dividends and retained earnings. The reserve fund carries over from year to year. Similarly, the retained earnings carry over into the following year and can be used for capital expenditures or other needs. The reserve fund and retained earnings remain in the entity. Thus, these accounts can affect the interest expense and/or interest income of the investment. Until their date of payment, distributed dividends can also affect the interest expense and/or interest income of the investment. The prior art methodologies do not account for such net income allocation and the interest credits and expenses associated therewith, which limit the accuracy of the underlying net present value calculation and analysis.    5. With regard to the monthly VAT payments, it is possible for a negative payment amount to be calculated in certain months, which means that negative payment is going to be carried forward in next month's payment, with financially beneficial results for the entity. The prior art methodologies do not account for such monthly VAT payments and the financial benefits associated therewith, which limit the accuracy of the underlying net present value calculation and analysis.
Thus, there remains a need in the art for improved financial analysis methodologies and tools that evaluate economic investments in a manner that is suitable for complex investments and in a manner that provides accurate results over a wide range of investments including complex and large investments.